Investors take note: Today's tech M&A wave is all about growth
For instance, with Microsoft (MSFT) gearing up to launch its new Windows 7 line next week, the tech industry has been buzzing about whether the release will finally kick off a long-awaited product cycle in the sector. But while tech chiefs are always talking up the promise of innovation, they're now starting to put their money where their mouths are.
A new generation of tech products -- the hot zones seem to be mobile Internet plays and new software services -- would bode well for investors. While the U.S. remains exhausted and indebted, corporate balance sheets are flush with cash on the heels of heavy cost-cutting and sharp rises in profitability.
Dell CEO Michael Dell (pictured) is one proponent of a "refresh cycle" coming to replace an ailing installed tech base, as he told an audience last week. He pointed to the promise of a new generation of chips from Intel, dubbed Nehalem, and the upcoming Windows 7 release, while noting that the current Windows XP line is eight years old.
Dell seems to be doing more than just paying lip service to growth prospects. In September, his company bought Perot Systems -- a company in the fast-growing software-as-a-service sector, which counts hot names like Salesforce.com (CRM) as leaders -- for $3.9 billion. Dell continues to be on the prowl for more acquisitions, and Intuit (INTU) bought the celebrated Web-based software startup Mint.com for $170 million in September.
"A lot of the activity has and will continue to be around expansion into new markets as opposed to consolidation," says Ron Lissak, a managing partner at San Francisco-based Catapult Advisors, an investment bank that specializes in technology M&A. Lissak also points out that the acquisition spree is coming after a major run-up in stock prices, meaning that buying is driven by a conviction about growth prospects rather than prowling for undervalued companies.
Indeed, other traditional Silicon Valley uber-acquirers are also marching into new markets. This week, Cisco Systems said it would pay $2.9 billion for Starent Networks. The move ups the routing giant's ante in the blazing mobile networking market while putting rival Juniper Networks (JNPR) in a tough position. That acquisition follows Cisco's jump into the fast-growing video-onferencing market through a $3 billion purchase of Tandberg ASA just weeks ago. Cisco also bought start-up flip-video camera maker Pure Digital for $590 million in May.
Chip giant Intel has also been active, paying $884 million for mobile software maker Wind River Systems in June. And the company's much-stronger-than-expected third-quarter results reported this week have fueled further speculation about what Intel may be on the hunt for next.
The bid for new markets stands in contrast to much of the acquisition activity over the past few years and during the last tech downturn. Major attempts like Microsoft's first run at Yahoo (YHOO) were focused on building scale in existing markets like search and display ads while cutting research and development costs.
And compare the current buys to the hallmark mergers of the last tech down cycle: Oracle's (ORCL) swallowing up of rivals PeopleSoft and Siebel Systems. At the time, Oracle CEO Larry Ellison declared that the traditional software business had finally matured and cost-cutting through consolidation would be the new focus.
With consumers still bruised, it remains to be seen whether a new generation of tech products will fuel a stronger-than-expected capital spending cycle and be enough to prop up the broader markets. But many tech chiefs are clearly betting that will be the case.